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Income inequality can be explained by household demographics

The Occupy Wall Street (OWS) protest has returned national attention to the topic of income inequality; see recent commentary from bloggers Megan McArdle here and James Pethokoukis here and here. Both highlight empirical evidence that challenges the narrative that income inequality has gotten worse over time.

Most of the discussion on income inequality focuses on the relative differences over time between low-income and high-income American households, but it’s also instructive to analyze the demographic differences among income groups at a given point in time to answer the question: How are high-income households different from low-income households? Recently released data from the Census Bureau (available here, here, and here) for American households by income quintiles in 2010 allows for such a comparison: see the chart below.

Here is a summary of some of the key demographic differences between American households in the bottom and top income quintiles in 2010:

1. On average, there were significantly more income earners per household in the top income quintile households (1.97) than earners per household in the lowest-income households (0.43).

2. Married-couple households represented a much greater share of the top income quintile (78.4 percent) than for the bottom income quintile (17 percent), and single-parent or single households represented a much greater share of the bottom quintile (83 percent) than for the top quintile (21.6 percent).

3. Roughly 3 out of 4 households in the top income quintile included individuals in their prime earning years between the ages of 35-64, compared to only 43.6 percent of household members in the bottom fifth who were in that age group.

4. Compared to members of the top income quintile, household members in the bottom income quintile were 1.6 times more likely to be in the youngest age group (under 35 years), and three times more likely to be in the oldest age group (65 years and over).

5. More than four times as many top quintile households included at least one adult who was working full-time in 2010 (77.2 percent) compared to the bottom income quintile (only 17.4 percent), and more than five times as many households in the bottom quintile included adults who did not work at all (68.2 percent) compared to top quintile households whose family members did not work (13.3 percent).

6. Family members of households in the top income quintile were about five times more likely to have a college degree (60.3 percent) than members of households in the bottom income quintile (only 12.1 percent). In contrast, family members of the lowest income quintile were 12 times more likely than those in the top income quintile to have less than a high school degree in 2010 (26.7 percent vs. 2.2 percent).

Bottom Line: American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.

The American economy and labor market are extremely dynamic, and evidence shows that individuals are not stuck forever in a single income quintile but instead move up and down the income quintiles over their lifetimes. It’s very likely that many high-income individuals who were in their peak earning years in 2010 were in a lower income quintile in prior years, before they acquired education and job experience, and they’ll move again to a lower quintile in the future when they retire.

Last November, presaging today’s protests on Wall Street, columnist Nicholas Kristof wrote in the New York Times (“A Hedge Fund Republic?”) that if Americans want to observe “rapacious income inequality,” they don’t need to travel to a banana republic. Rather, he suggests that “you can just look around” the United States to see “stunning inequality.” Given the significant differences in household characteristics by income group, it shouldn’t be too stunning that there are huge differences in incomes among American households, and it has nothing to do with “rapaciousness.” Rather, it can be easily explained by household demographics.

Discussion: (25 comments)

Analysis in Summary point 5 needs to be corrected. It should say that more than 5 (not 7) times as many households in the bottom quintile included adults who did not work at all (68.2 percent) compared to top quintile households whose family members did not work (13.3 percent).

Other than that, this is illuminating and helpful in countering the unsubstantiated party line that the income gap has grown disproportionately over the last 5 decades. Thank you.

Bingo… what a ridiculous post…. I haven’t seen a hole lot of OWS protestors carry signs saying we’re the 80%.

In fact the massive increases of wealth confined to the top 0.1% amount to some significant 4-5% of the gross GDP…. THAT might explain a lot of the protestors concerns that have to do with real economic disfunction.

But when you are paid to protect the fortunes of others via the AEI you have to say something and hope no one is paying attention.

That’s not the point. The point is when you break out the top 1% or the top .1% you find something very different. They have become such massive outliers that they throw the scale off quite drastically, and the percentage increase in wealth (forget the income chart, that doesn’t even tell the full picture because the people at the very top don’t make the majority of their wealth through capital gains, which isn’t reported as income) is many times higher than even the top 5 or 10% let alone the bottom 90, even as the number of income earners per household falls.

The whole analysis seems pretty dumb though. No family has .042 or 1.97 income earners. They have 0, 1, or 2. So if you want a real picture, you need to see what the percentage of each is for each quintile, and look at it over time. What you will find is that the gains by the bottom 99 are accompanied by having additional income earners (i.e. my grandmother never worked, but my mother does, and my grandparents were better off than my parents, even though my parents are still in the top 10%). Which means there is a very real argument for the quality of life going down even as the standard of living goes up.

Far be it from this blog to show statistics that don’t fit the story it is trying to present though.

Actually most of them are upset about the deterioration and downsizing of the almost-elite to which they aspired to belong. They are upset that their overpriced degrees in the humanities have not secured them a position within the American nomenklatura:

The top 1 percent are a somewhat different story, but not for the reasons these comments state. The top 1%’s incomes are very volatile and have become more volatile over the years: You don’t stay there for long. See Robert Frank, “The Wild Ride of the 1%”, Wall Street Journal (10/22/2011).

If 21% of top-quintile households are single, how can the top quintile average 1.97 workers per household? Even if everyone in every household was employed, the best would be 1.79, wouldn’t it? Unless other generations are sharing the home while working, which seems unlikely.

Mark, I find your analysis incomplete. Demographic differences are relevant only to the degree they hold constant the differences in income inequality, which all studies show they do not. One need only look to median income which peaked in 1973 to understand that the average worker has not seen wage gains over the preceding generation and that median household income has increased due primarily to increased hours and labour participation of women.

Everything you write in this paragraph must be completed by analysing how the quntiles relative demographics change. it is not enough to cite absolute demographic differences:

“American households in the top income quintile have almost five times more family members working on average than the lowest quintile, and individuals in higher-income households are far more likely than lower-income households to be well-educated, married, and working full-time in their prime earning years. In contrast, individuals in low-income households are far more likely to be less-educated, working part-time, either very young or very old, and living in single-parent households.”

Lastly, many of the articles cited in the Pethokoukis piece do indeed claim, contrayy to Jim, that income inequality has risen. See here:

Bottom line: If you want to make an argument that specific extraneous variables have changed in two sample comparison groups, rendering comparison difficult, you must do one of two things: hold those values constant in one group or allow random variation – and re-run the assessment to make the analysis valid. Doing so reveals that income inequality has increased.

You cannot argue that differences in those extraneous variables between groups accounts for the changes in the variable assessed without controlling for change over the period of time assessed. this is standard statistical analysis.

While the trends seem clear in this data as it is presented, the causation is more important, and impossible to determine from this. Does someone have a lower income because they are divorced (certainly) or is someone divorced because income was a stress in their marriage that caused it to split (which then exasperated the income level)? Education level is the only one that can be demonstrated to cause a difference in income level on average.

Or it could be that people who are lucky enough to do well in life like to feel that they are competent and have made wise choices, and that this is the difference between them and those who are unlucky. In other words, if you find yourself standing on third base, better check whether or not you were born there before you give yourself credit for hitting a triple.

Looking at it the same way with body weight. Turns out I’m not as fat as I thought. Nowhere near the top 1%.

The truth is, OWS is angry that the rich get richer. The quality of life in america, even amongst the bottom 5% is light years better than most other countries. They are complaining about a class they were never going to be a part of anyway. Did anyone think of Bill Gates any differently than they do now when he was worth only a quarter of what he’s worth now? Homeless people have cell phones. OWSers are banging on drums and playing guitars they bought with some kind of money. Money doesn’t buy happiness. Any good parent will teach you that. Money doesn’t buy good parents either. Good parenting……….hmmm I’d like to see the bottom 50% demos on that.